Home mortgage interest includes any interest paid on a loan secured by your home. The total amount paid by a taxpayer, even if reported on Form 1098, is not always fully deductible. Do you know how much to deduct?

Home mortgage interest may be deducted if all of the following conditions are met:

• The taxpayer files Form 1040 and itemizes their deductions on Schedule A;
• The mortgage is a secured debt on a qualified home in which the taxpayer has an ownership interest; and
• The taxpayer and the lender actually intend for the loan to be repaid.

A secured debt is one in which the taxpayer signs an instrument such as a mortgage, deed of trust or land contract that:

• Makes the ownership in a qualified home security for payment of the debt;
• Provides, in the case of default, that the home could satisfy the debt; and
• Is recorded or otherwise perfected under applicable state or local laws.

A qualified home includes both the main home where you ordinarily live and a second home of your choosing. The main or second home can be a house, condo, cooperative, mobile home, house trailer, boat or similar property as long as it includes sleeping, cooking and toilet facilities.

The actual deductible amount of home mortgage interest depends on the date of the mortgage, the amount of the mortgage, and how the mortgage proceeds were used. If the mortgage debt relates to any of the mortgage categories listed below, it is fully deductible; if not, the deduction is limited to the interest paid on the taxpayer’s qualified loan limit. The deductible mortgage categories include:

• Mortgages took out on or before October 13, 1987 (referred to as grandfathered debt);
• Mortgages took out after October 13, 1987, to buy, build or improve your home (referred to as acquisition debt), but only if these mortgages plus any grandfathered debt totaled $1 million or less; and
• Mortgages took out after October 13, 1987, other than to buy, build, or improve your home (referred to as home equity debt), but only if these mortgages totaled $100,000 or less AND totaled no more than the fair market value of your home reduced by the two previous categories.

Ultimately, if you have mortgages which exceed $1.1 million or have refinanced your mortgage debt and used some of the proceeds for personal expenses, the total home mortgage interest paid during the year is not fully deductible. In these cases, the taxpayer will need to track their mortgage debt and calculate the deductible amount of home mortgage interest each year.

Contact Flexible Accounting Services of the Triangle today and let our experienced professionals assist you with these complicated tax regulations.